Sourcing as strategy

Sourcing as strategy
A manufacturing firm with $18b in revenues transformed its
procurement process from a transactional cost center into a
source of strategic advantage, putting themselves on track to
save $500m at the same time.
Advisory Services
Manufacturing
August 2014
Client’s challenge
A change in the board at a Fortune 200 manufacturing company prompted serious
discussion of efforts to simplify the business and increase margins. Throughout its
history, the company had grown through an aggressive acquisition policy, but after
acquiring firms, it did not integrate them. The company's decentralized structure had
benefits like flexibility and an entrepreneurial culture, but minimizing costs was not one
of them. With annual spend on the order of $9 billion, the board recognized that
significant costs savings could be achieved by leveraging their procurement, especially the
commodities used across its manufacturing operations. But the company didn't have the
expertise to build a consolidated purchasing program on their own. They needed
specialized help to develop the processes and create the organizational structure that
would make a material difference, so they issued an RFP soliciting an assessment of the
value they could achieve with a leveraged purchasing program.
PwC’s solution
PwC's direct experience with procurement excellence, facilitating and enabling large scale
operational change and integrating business functions after acquisitions helped them
earn the engagement. The proposed plan would unfold in three phases: assessing the
client's procurement capabilities and potential savings, building the processes and a
centrally-led procurement organization, including pilot commodity testing, and finally
transferring control of a self-sustaining procurement operation back to the client.
The first phase of the project included an assessment of the company's global commodity
spend to identify opportunities for significant savings and an evaluation of their
procurement capabilities. The spend analysis revealed up to $500 million in savings that
could be achieved over five years. To achieve the goal, PwC advised the company to
implement three linked strategies, and when the board approved them, PwC went to work
on the remaining phases of the initiative.
First, the manufacturing company had to transform procurement into a strategic
function. This meant more than just consolidating purchases. It also meant working with
suppliers to innovate and improve end products, developing a strategic understanding of
their supplier relationships, and seizing opportunities to stay ahead of the commodities
marketplace. Second, the company would need to build a hybrid centralized procurement
division from the ground up. They had no CPO. In fact, procurement didn't even have a
seat at the table when executive-level strategic decisions were being made. That had to
.
change. Procurement would have to become a proactive part of the firm's strategy. They
would need to be able to recognize risks and seize opportunities as they arose. And finally,
PwC helped plan and facilitate the execution of sourcing initiative pilots to demonstrate
the savings and build momentum for the cultural change that would have to take place if
the new procurement strategy were to endure.
PwC and the manufacturing firm went to work building up its procurement division. The
firm hired a CPO and brought the heads of the firm's business units on board with the
initiative. PwC held workshops to train key personnel in each business unit to define their
sourcing strategy, develop their organizational structure, and to identify key sourcing
projects and savings targets.
Impact on client’s business
The manufacturing company is well into the second phase of its procurement
transformation. A hybrid centralized procurement department has been built. The chief
procurement officer has been hired, and the initiative's steering committee now serves as
a strategic sourcing advisory board. The changes at the leadership level are filtering
through the organization as a whole. Each of the business units has adopted strategic
sourcing as a means of achieving both savings and innovation.
The pilot tests on several commodities have yielded +$50 million in savings, ranging
from 3% on some commodities to over 25% savings on others. Overall, the annualized
savings rate from the project is $80 million--and there is a pipeline of more projects that
project up to another $150 million in savings. There are tools, templates and processes
developed and in place to continue to identify opportunities for savings across the
organization. Most important, though, is the culture change that has taken root. Where
procurement had been simply a cost of doing business, this manufacturing company now
recognizes that it can be a strategic weapon, one deployed not just in the name of cost
savings, but also to achieve product innovation and long-term growth for the firm.
For more information, please visit
www.pwc.com/us/consulting
Or contact
Sebastian de Meel
Director
(313) 394-6025
[email protected]
Oliver Hazimeh
Principal
(734) 276-3446
[email protected]
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